Litigation can wear down both parties. And often, the investment in litigating can seem too risky for even large companies with extensive resources. This article will address the variables in determining whether to settle, as well as settlement strategy at various stages in litigation. There is always a cost-benefit analysis starting even before the complaint is filed and that, coupled with the proper timing, can dictate a favorable resolution. The analysis of whether to settle should, at a high level, consider the likelihood of a favorable outcome at trial, a potential settlement range, and potential costs.
There are a multitude of factors that can affect the decision to settle. Momentum can change. Facts can come to light. Witnesses can prove less credible than originally thought. Financial resources may be minimal. These are all considerations a client and their attorney should evaluate from the onset of the claim.
Litigation is a burden and opportunity costs must be considered by both parties. Responding to discovery, communicating with outside counsel, internal counsel’s workload, and training employees to support litigation takes significant time. Document management is challenging even from a day to day operational standpoint, but to access and produce records for discovery as well as making employees available for depositions and trial can take considerable time away from business operations. Considering most commercial litigation cases can go on for years, time is certainly a major factor in settlement strategy.
Regardless of the strength of the claim, what damages a plaintiff can collect is another major factor in settlement strategy. If a plaintiff knows they will be limited in recouping damages even if they pursue litigation aggressively, proceeding all the way through trial is likely fruitless. A plaintiff must also consider that the attorney will generally take at least third of the settlement or as much as half if the case goes through trial. A plaintiff will need to compare the cost and likelihood of obtaining a quick settlement against the risks and anticipated return of a future settlement or verdict. Taking less can often end up saving money long term.
Aside from legal liability, a business needs to keep their reputation in mind. A negative perception can affect revenue, which ultimately undermines a potential recovery of damages or avoidance of paying out damages. For example, if a software company decides to sue one of its longest standing licensees for using licenses out of scope, other businesses looking for software solutions may take notice and avoid doing business with that software company. In those instances, an early settlement is often desirable.
Strength of the Claim
The facts and their application to the law determine the strengths and weaknesses of the case. A client and their attorney should evaluate any developing information including information discovered through requests (e.g. motions to produce documents, depositions, and interrogatories), Court orders based on pre-trial motions, and case law.
Also, in that same example, preserving the business relationship could be more important (e.g. there could be future revenue through technical support for the software) than securing a judgment.
Commercial considerations should always be a major factor in the settlement analysis. For example, if the company is publically traded, a party needs to be aware of the ramifications on the stock price.
Determining When to Settle
Timing of settlement is a fluid process, but it should be calculated at every stage. Sometimes, a party has a good sense the case will settle even before the complaint is filed. In some cases, the complaint is a tool to simply force the parties to come together to work on a resolution. Regardless of when the parties hit a breaking point, settlement terms should be finalized early to save money on court costs and attorney’s fees, and potentially maintain the business relationship.
Discovery Settlement Strategy
It is prudent to determine the likelihood of settlement before discovery because it is generally the most costly phase of a lawsuit. Discovery however can give a party the information it needs to leverage a higher or lower settlement figure. For example, depositions are ripe for this type of information where witness credibility and strength of testimonial evidence come out. Tracking down witnesses, holding depositions, and motion filing affects accessibility to the information. Even after obtaining the evidence, admissibility is another threshold to meet, which involves motions to the court. The challenges inherent in obtaining the necessary evidence and then being able to utilize it can force early settlement. A party will need to weigh the benefit and potential of gaining this information against the cost of obtaining it.
Pre-Trial Settlement Strategy
If the parties have arrived at the trial date, then reality starts to set in. A party may not feel comfortable with the uncertainty of the case going before a jury or with recent pre-trial rulings that will stymie the case. This stage still leaves the opportunity to limit damage to public perception and creating negative precedent with business partners.
At Trial Settlement Strategy
Settlement can occur during the trial also. Although parties may feel “pot-committed” having exhausted resources and time, trial presents other factors such as:
- How receptive the jury is to the attorneys
- The judge’s rulings on evidence
- Effectiveness of witnesses
- Length of the trial
- New evidence
The parties may even consider settling post-trial if they feel the judge misapplied the law or the jury was completely off base with their verdict.
Achieving the Best Settlement Outcome
Some unique tactics to achieve the most favorable outcome include:
- Leverage personalities and identify key decision makers.
- Structuring the settlement in installment payments makes it more palatable for a defendant.
- Create a new business relationship within the settlement agreement. Keeping with the software company example, if the software is mission critical to the licensee, they will want to continue to use it and the software company will want to keep them as a customer to explore additional sales opportunities and collect maintenance and support revenue. Consequently, the parties could simply negotiate an order document licensing the misused software in a different scope and incorporating settlement language in the order. Another alternative is the software company could extend a credit that the licensee could use to acquire additional licenses or technical services.
Other Considerations in Settlement Strategy
Other factors that a party should cover with their attorney when deciding on settlement options include insurance coverage for pay-outs, tax implications, and attorney’s fees. Although insurance and taxes are almost impossible to contract out of, attorney’s fees allow some room for negotiation. A defendant can always request a breakdown of fees and incorporate those fees into the overall settlement figure.
A party may also want to consider how the offer is presented. For example, making the offer in open court shows a good faith effort to close out the case and puts the opposing party at risk of looking unreasonable if they do not seriously consider the offer.
Drafting the Settlement Agreement
Seizing the opportunity to make the first offer brings with it the ability to control the document. A drafter must also consider the including confidentiality obligations to keep the settlement terms private and include a properly tailored release of claims in the agreement so that future claims are not released.
Contact Us Today
To learn more about settlement strategy, contact Snellings Law, LLC today at 973-265-6100.